Tim Pawlentys Dippy Dive into Deep Doo-Doo

One of the three ‘serious’ candidates for the 2012 Republican White House bid says the tax cuts for the rich he’s proposing will expand America’s ‘entrepreneurial’ class. What does history say?

Last week, in a “major policy address,” GOP Presidential hopeful Tim Pawlenty called for a massive tax cut that would save Americans who make $1 million or more a year, Washington tax experts estimate, an average $288,800.

One listener in Pawlenty’s audience, a University of Chicago student, had a question for the former Minnesota governor. How could Pawlenty, the student asked, justify still another round of tax cuts for the wealthy?

Pawlenty, a savvy pol, never missed a beat.

“Set aside whether the wealthy benefit or not,” Pawlenty urged the student. “The real measure of this proposal is: Is it going to generate, in a transformative, significant way, more jobs for more people across this country?”

Pawlenty, naturally, believes his tax cutting will do just that — by widening the ranks of what he calls the “entrepreneurial class.”

“There’s about 5 percent of the country that is our entrepreneurial class, the people who start businesses, form capital, deploy capital, add employees, build buildings, invent things, conduct research, commercialize it, and the like,” Pawlenty explained.

“If that 5 percent becomes 6, 7, 8, or 9 percent, we’ve got a very bright future,” he continued. “And if that 5 percent becomes 4, 3, 2, or 1 percent, we are in deep doo-doo.”

Can we test this notion, this claim that tax cuts for taxpayers at the top pay off big in expanded entrepreneurial energy? Turns out we can.

If cutting taxes on America’s richest really helps extend “entrepreneurial” wherewithal beyond our richest 5 percent, then folks in that “6, 7, 8, or 9 percent” should have done just splendidly over the past 30 years, a span of time that has seen taxes on America’s rich drop to their lowest level in generations.

Did these folks do just splendidly? The numbers, please.

In 1980, the year before President Ronald Reagan began lavishing tax cuts on America’s rich, those taxpayers just outside the top 5 percent — the folks statisticians describe as sitting in the 90th to 95th percentiles of our income distribution — averaged $97,687 in income, after we adjust for inflation.

In 2008, the most recent year with IRS figures available, this same group averaged $127,184, a 30.2 percent increase. In other words, after three decades of Reagan and Bush tax cuts for our wealthiest, taxpayers just outside the top 5 percent saw their entrepreneurial wherewithal increase all of 1 percent a year.

Not a particularly impressive increase. And this exceedingly modest increase becomes even less impressive when we compare the three decades since 1980, a time when tax rates on rich people fell, to the three decades before 1980, a time when taxes on rich people ran consistently high.

Between 1950 and 1980, average incomes in the 90th to 95th percentiles jumped from $49,646 to $97,687, a 96.8 percent increase, after taking inflation into account — over triple the income boost this income cohort has seen since 1980.

So whohas benefited significantly from all the tax cuts for the rich since 1980? Let’s phrase that question a little differently: Who’s buried in Grant’s tomb? The rich — surprise, surprise — have benefited the most significantly from the past 30 years of exceedingly generous tax giveaways to the rich.

Since 1980, University of California economist Emmanuel Saez has detailed, the inflation-adjusted incomes of America’s top 1 percent have increased 166.5 percent, from $426,906 to $1.14 million.

But incomes in the upper reaches of that top 1 percent have soared even faster. Taxpayers in the top 0.1 percent have seen their incomes jump 288.9 percent since 1980. And taxpayers in the top 0.01 percent have seen their incomes skyrocket 402.8 percent, from $5.4 million in 1980 to $27.3 million in 2008.

This top 0.01 percent, over these same years, has quadrupled its share of America’s national income. In other words, that “entrepreneurial” wherewithal that Tim Pawlenty so prizes isn’t spreading out beyond the top 5 percent. It’s concentrating within the tippy top of the top 1 percent.

We have moved into what Tim Pawlenty might call “deep doo-doo” territory. And Pawlenty, incredibly, wants us to step even deeper in it.

Pawlenty’s tax plan, if ever enacted, would erase all federal taxes on the capital gains, dividends, and interest that pour into rich people’s pockets — and, just for good measure, drop the top tax rate on rich people’s ordinary cash income down to 25 percent, a 10-point drop from the current 35 percent and a 66-point drop from the 91 percent top rate in effect 50 years ago.

Center for American Progress tax expert Michael Linden is dismissing Pawlenty’s new tax plan as “sheer fantasy.” But this fantasy plan could well become reality. Not one of Pawlenty’s GOP rivals, after all, has yet disavowed it.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up at Inequality.Org to receive Too Much in your email inbox.